You can read our submission here.

In brief, we are proposing a private right of action to courts for abuse of dominance. This has already worked in the US and the EU. It’s being used in the UK, Australia, New Zealand, South Korea, Argentina, and Saudi Arabia. By adding three words to the Competition Act, Minister Champagne can increase innovation, protect small towns, and allow billions of dollars in compensation to be recovered by consumers who have been wronged. We urge Minister Champagne to adopt these changes.

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In a case decided June 8, 2017, Mendoza v. Active Tire & Auto, 2017 ONCA 471, the Court of Appeal re-affirmed these principles. If the disclosure document fails to comply with mandatory rules about what must be included, the document will be deficient and give rise to franchisee rights to rescind the franchise agreement. A right to rescind will arise even if the franchisee did not read the disclosure document, the Court of Appeal concluded.

The crucial deficiencies in Mendoza were that the disclosure certificate was signed by only one officer or director, not two, and the audited financial statements were outdated. Deficiencies with a certificate and in financial statement disclosure have been repeatedly confirmed in other cases to give rise to franchisee rights to rescind the franchise agreement within two years of entering into it and to claim repayment of all monies paid to the franchisor, investments made to acquire the franchise and operational losses.

Franchisors must ensure that disclosure documents are in full compliance with the Act because technical defences that focus on the franchisee’s lack of reliance on recognized deficiencies will not succeed.

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Whether a U.S. parent company ultimately would be held liable is open for debate, because the Ontario Court of Appeal simply considered whether the alleged claims were so fundamentally flawed that they were obviously doomed to failure. The court held they were not.

The background facts involve the General Motors restructuring. Canadian car dealers who entered into dealership agreements with General Motors Canada Limited (“GMCL”) alleged that GMCL’s U.S. parent company, recently emerged from U.S. bankruptcy proceedings in 2009, was liable for breaches of good faith and fair dealing under Ontario’s Arthur Wishart Act (the “Act”) because it was a “franchisor’s associate” under the Act.

A “franchisor associate” may be liable for a variety of claims under the Act, including liability for rescission damages and misrepresentations. Typically, proving that someone is a “franchisor’s associate” requires evidence that the person is “directly involved in the grant of a franchise” or “exercises significant operational control over the franchisee […].”

The Ontario Court of Appeal refused to strike the claims, concluding that the plaintiffs had pleaded sufficient ties to the U.S. parent that the claims should be determined on the basis of a “full record.” With respect to the “grant” of a franchise, the Court of Appeal concluded it was arguable that conditions stipulated by the U.S. parent were conditions that needed to be met before obtaining “the right to engage in a business.” The plaintiffs also alleged that the U.S. parent “exercises significant operational control and direction over GMCL and [the dealers] through the terms of the [alleged franchise agreement],” and that “GM US directs and controls the composition and structure of the GMCL dealer network, the products that will be distributed by GMCL in Canada, the pricing of those products, and marketing initiatives and spending.” Taken together, these elements of control were sufficient to allow the plaintiffs’ claims to survive against the U.S. parent as “franchisor’s associate,” even though it was not party to the Canadian franchise agreement.

“Joint employer” issues involving potential franchisor liability for employment laws are hot topics, particularly in the U.S. The Court of Appeal’s decision shows there are still other significant potential sources of liability for parent companies to consider when structuring their Canadian franchise systems.

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However, in a recent decision dated February 29, 2016 (MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168), the Ontario Court of Appeal refused to enforce a non-competition covenant because the franchisor did not intend to open another franchise store within the protected geographic area. The court ruled that non-competition covenants must be limited to protecting “the legitimate interest of the franchisor” and cannot go further. While the court acknowledged typical justifications for enforcing non-competition covenants in a franchise relationship (involving protection of goodwill, trade secrets and methods of operation), the court decided these justifications were not warranted if the franchisor no longer intended to operate within the protected territory. By deciding it no longer will operate within the protected territory, the court ruled, a franchisor effectively acknowledges that there is no legitimate interest to protect within the defined scope of the covenant.

While the decision is unlikely to have any impact on franchisors who continue or plan to continue operating in the same protected area after a franchise relationship ends, the case could have an impact on a variety of franchise scenarios involving system-downsizing or franchisor uncertainty about a market, for example. A franchisor considering enforcement of a non-competition clause in these scenarios must give serious thought to its “legitimate interests” at stake before seeking to enforce.

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However, embedded throughout Ontario’s Arthur Wishart Act are references to a franchisor “granting” a franchise to a franchisee. “Grant” is defined as including “the ownership of shares in the corporation that owns the franchise.”

There are many ways to structure an investment in a franchise. Some are driven by tax planning strategies, particularly arrangements involving master franchisees.

A recent court decision described one such scenario, in which three individuals incorporated a numbered company. The numbered company, in turn, owned 50 percent of the master franchisee, with the franchisor owning the remaining 50 percent.

The issue the court was required to consider was whether the individuals investing in the numbered company had the right to bring Arthur Wishart Act franchise claims against the franchisor on the basis they met the definition of “grant”: they owned shares in the corporation that owned the franchise.

The Superior Court of Justice rejected the shareholders’ arguments, holding the effect of the overall arguments could extend franchise rights to any shareholder of a franchisee, leading to unexpected consequences. The court concluded that if such a change was warranted, it should be made by the legislature, not the courts.

The Superior Court left open the possibility for a different result in a different case, noting several times in its decision that the shareholders’ record was “entirely deficient” in describing the purpose of the various investments made by the shareholders. The court had no basis to analyze how the shares were acquired, the purpose of the payments made by the shareholders, payments made by the numbered company and the purpose of those payments.

The effect of the Superior Court’s judgment in JM Food Services is that shareholders of a franchisee have a challenging, but not impossible road to establish rights under the Arthur Wishart Act.

A copy of the decision can be found here: 2313103 Ontario Inc. et al. v. JM Food Services Ltd. et al., 2015 ONSC 4029

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In a recent decision of the Ontario Superior Court of Justice, Addison Chevrolet Buick GMC Limited et al. v. General Motors of Canada et al., 2015 ONSC 3404, the court struck claims sought to be made against a purported franchisor’s associate. The court also struck attempts by the franchisee to “pierce the corporate veil” to make claims against persons other than the franchisor. The decision provides guidance on resolving claims made against franchisor’s associates in a cost-effective and timely way.

In its decision, the Superior Court of Justice held:

• The Arthur Wishart Act does not impose blanket joint liability on franchisor’s associates for everything done by a franchisor.

• An individual is not a franchisor’s associate unless he or she: (i) meets a “control test” (controlling the franchisor or being controlled by the franchisor) and (ii) is directly involved in the grant of a franchise (or exercises significant operational control over a franchisee).

• The court will not lightly “pierce the veil” of the corporate franchisor to hold individuals liable unless the corporate entity is “completely dominated and controlled and is being used as a shield for fraudulent or improper conduct.” Only “exceptional cases that result in flagrant injustice warrant going behind the corporate veil.”

• The balance struck by the Legislature in the Arthur Wishart Act should not be lightly disturbed in favour of an ad hoc approach to piercing the corporate veil.

The court’s decision in Addison illustrates that while there are indeed powerful rights and remedies available against franchisor’s associates, the principles are not unlimited. Persons who are not genuine franchisor’s associates have remedies and options to be removed from claims in a cost-effective and timely manner.

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The Court of Appeal concluded the franchisor was required to support, promote and protect the brand, and held Dunkin’ Donuts liable for almost 11 million dollars to its franchisees for many years of neglecting its franchise system in Quebec.

While there are arguments to say the decision should not be applied outside Quebec, prudent franchisors will plan for the possibility that its principles could apply elsewhere. The Quebec Court of Appeal referred to the Quebec Civil Code in its decision but also cited binding common law principles from the Supreme Court of Canada and the Ontario Court of Appeal in its analysis, opening up the possibility the principles would be applicable outside Quebec.

The decision is definitely an interesting franchise one for lawyers and very important to franchisors because the Court of Appeal implied a number of principles into the contract based on rights and obligations commonly contained in many franchise agreements. It concluded there were implicit obligations based on the existence of “a long-term collaborative relationship, between the Franchisor and each individual franchisee, within an established network in which service and quality of experience were imagined as nearly identical from restaurant to restaurant.” This type of relationship will exist in many other franchises too, leading to the possibility for arguments about implied obligations in other cases. The Court of Appeal was clear that while “a business has a degree of latitude in deciding […] the appropriate measures to be taken in conducting its affairs,” no decisions are insulated from review by the courts.

While some are critical of the decision for its potential to second-guess business decisions based on the use of implicit obligations, the core conclusion of the Court of Appeal is straightforward, based on common sense and of little surprise to good franchisors: a franchisor is required to protect and promote the brand. Successful, entrepreneurial franchisors building excellent systems do this every day. Of course, requiring the franchisor to protect and promote the brand is no guarantee of profitability.  It is still expected that franchisors will be free from exposure from bad business decisions made in good faith in developing their brands.

Whatever courts will make of implicit obligations in future cases based on Dunkin’ Donuts, the decision turned on the facts of the case. The franchisor in Dunkin’ Donuts fell well short of the mark. The basic conclusion of the decision is “business as usual” for committed, entrepreneurial franchisors.

¹ Dunkin’’ Brands Canada Ltd. v. Bertico Inc.
http://www.canlii.org/en/qc/qcca/doc/2015/2015qcca624/2015qcca624.htm

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The original judge’s decision suggested there was a requirement to disclose all forms of litigation involving the franchisor. The Ontario Court of Appeal disagreed. The Court of Appeal concluded the franchisor was not required to disclose the outstanding litigation because it involved a former franchisee who was operating a competing business in a different market from the prospective franchisee’s market, which would have no economic impact on the prospective franchisee’s operations. The facts of the case were not “material facts” requiring disclosure. The litigation was not relevant to the prospective franchisee, and did not involve allegations of unfair or deceptive business practices and did not involve the alleged breach of franchise laws.

The Court of Appeal clarified that determining whether litigation must be disclosed is a “question of fact determined on a case-by-case basis.” No bright-line rule can be articulated. Franchisors should periodically review with their franchise counsel whether disclosure documents should be updated to list outstanding litigation, or whether references to litigation that is not material can be omitted.

A copy of the Court of Appeal’s decision, called Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc., can be found here.

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The court relied on a renewal exemption in the Arthur Wishart Act (Franchise Disclosure), 2000, saying that because the franchise holder knew the facts—he would have to renovate his store at some point in the future, as described in the original agreement signed some 15 years ago—there was no requirement to provide them again formally in a new disclosure document.

There are very few court decisions on how and when exemptions to disclosure obligations are available to franchisors. This case makes it clear that disclosure on renewal will not be required, provided the franchisee has full knowledge of material facts as defined by the province.

But franchisors still need to pay close attention to disclosure requirements. Relying on exemptions in the legislation can be costly, and fraught with uncertainty. Though Pizza Pizza won this case, there remain many unanswered disclosure questions.

Whenever a franchise agreement is being considered or renewed, legal advice is needed to understand how Ontario’s disclosure laws will apply.

The full decision is available on-line.

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In Fairview Donut Inc. v. The TDL Group, a number of Tim Hortons franchisees brought a claim which they were seeking to have certified as a class proceeding against Tim Hortons relating to two important system-wide changes. The first of these was the decision to eliminate scratch baking of donuts and other goods in-store. Scratch baking was replaced with “par baking,” in which baked goods were prepared at a centralized facility and frozen for delivery to stores. A number of franchisees complained the change to “par baking” was detrimental because their costs increased with few to no corresponding benefits. The second change involved Tim Hortons’ roll-out of lunch menu items like soups and sandwiches. Again, a number of franchisees complained that Tim Hortons required them to sell these items at break-even prices or at a loss, all while Tim Hortons continued to be paid rent, royalties, and advertising fees on the franchisee’s total sales.

The decision rejecting the franchisees’ claims on their merits is very lengthy, exceeding 150 pages. Given its sheer length, it is difficult to capture the diverse issues in a short update. The case considers issues including a franchisor’s obligation to act in good faith and its duty of fair dealing under the Arthur Wishart Act, principles of contractual interpretation, Competition Act issues in supply agreements, and more.

The court analyzed the contract and found that the franchisor had the right to make system changes of the nature complained of. However, the court carefully considered how the franchisor implemented its decisions.

One critical point of analysis repeatedly emerges in the decision as helpful guidance for other franchise systems: the importance of communication between a franchisor and its franchisees. When Tim Hortons was considering important changes to its system, it consulted with its franchisees before the changes were made, while the changes were being made, and afterwards. The judge described the discussions that occurred as “detailed” and “granular.” Ultimately, these extensive consultations helped to defeat the claim in part because (i) through these consultations and dialogue, many franchisees truly believed the changes were beneficial, not harmful, leading them to disagree with the franchisees who thought the changes were harmful, and (ii) the franchisor was able to demonstrate it discharged its obligations of fair dealing under the Arthur Wishart Act in part by listening and taking into account franchisee concerns.

Everyone knows about the importance of communication with others to resolve problems, understand concerns and to make better decisions. No one likes being forced to do things if they perceive no one is listening to their legitimate issues. The court’s decision in Tim Hortons is another reminder of this simple fact. Communication will not only help to make better business decisions, but may also help strengthen a franchisor’s legal case in support of making important changes to a franchise system. If you are contemplating system-wide changes to your system, it makes sense to speak with your professional advisors to put yourself in the best position.

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